Countries without a central bank

Among the reasons Javier Milei, the elected president of Argentina, has become famous is his radical and often bizarre ideas on economic issues: among other things, he proposed abolishing the Argentine currency, the weight, and adopt the American dollar as its currency. He also proposes – with a certain tendency towards exaggeration – to “blow up” the Argentine central bank, which with the adoption of the dollar would no longer be useful and which, according to Milei, is the reason for the eternal economic crisis in where the country is located. himself.

Milei’s excessive statements aside, there are actually some countries that do not have their own currency and therefore they abandoned have a central bank among their institutions. However, these are almost all very small states with underdeveloped economies, and therefore difficult to compare with Argentina: if Milei actually implemented his idea of ​​dollarizing the economy and closing the central bank, the consequences could be unpredictable.

Among the countries that do not have their own central bank, we find mainly small island states. For example, there are certain countries in Oceania: the Federated States of Micronesia ; Kiribati a republic that includes 33 coral atolls and various islets stretching along the equator; Tuvalu ; THE Marshall Islands ; Nauru , an island of 21 square kilometers; and thePalau Archipelago . These states adopted the American or Australian dollar as their currency: their economies rely mainly on tourism and the importation of goods from abroad, and with this decision they ensured that they had stable currencies to trade without risk of strong fluctuation in exchange rates. .

Among the island countries without a central bank, there are alsoIsle of man an island in the Irish Sea which is not part of the United Kingdom but which still depends on the British crown: it has its own currency issued by the local Treasury, the Sterling man which is however linked to the pound sterling and therefore dependent on the policies of the Bank of England.

In Europe, there are three states without their own currency or central bank, namely the Principality of Monaco, Liechtenstein and Andorra. All three adopt the euro as their official currency and this has never posed any particular problems: both because of their proximity and their real economic links with European countries, for which having the common currency is quite functional, but also due to the fact that given their importance uniformity with the rest of the European economy can remain without distortions within the framework of the monetary policies of the European Central Bank. Instead, they use the euro although they have a central bank, albeit with limited tasks, in San Marino, the Vatican, Kosovo and Montenegro.

When you abandon your own currency and your central bank, the risks of distorting the economy are quite high. A state without a central bank first of all loses the possibility of having its own monetary policy: it cannot print money, it cannot set the level of reference interest rates or the exchange rate in relation to other currencies. Concretely, it does not have the possibility of using monetary policy to stabilize the economy when necessary (for example when interest rates are increased to combat inflation).

When you adopt another currency you essentially decide to submit to the monetary policy of the central bank which issues it: if you adopt the euro you are subject to the decisions of the ECB, if you adopt the dollar to those of the Reserve Federal, United States Central Bank.

And this can create distortions if there are large differences between countries with a common currency. To put it simply, currencies are the mirror of the economies they represent: strong economies have strong and stable currencies, such as the dollar for the United States or the euro for the euro zone; Weak and unstable economies have weak and unstable currencies, which can quickly lose value. Imposing a strong currency, like the US dollar, on a weak economy and on the verge of default, like Argentina’s, would create a series of distortions that could put the economic system at risk.

There are, however, countries in South America that have officially adopted the dollar as their currency: Panama, which also renounced its central bank, Ecuador and El Salvador, which however retained their central bank for other tasks , such as banking supervision. Here again, the only possible comparison is by geographical proximity: these three countries have much smaller and less problematic economies than that of Argentina.

Source: ilpost

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